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THE PACIFIC ISLANDS FISCAL POLICY TO BUILD RESILIENCE AND ADDRESS VULNERABILIT Y
Pover ty Reduction and Economi c Management East Asia and Pacific Region
The World Bank Pacific Department www.wordbank.org/pi
THE PACIFIC ISLANDS S M A L L A N D I S O L AT E D ( B Y L A N D ) | L A R G E A N D C O N N E C T E D ( B Y O C E A N )
Pacific Islands: Extreme Remoteness from Major Markets
Average GDP-weighted distance from markets (km)
16,000
All Countries 14,000
Pacific Caribbean
12,000
10,000
8,000
6,000
4,000
10k
100k
1m
10m
Population (logarithmic scale)
10bn
OUTLINE Vulnerability to shocks
volatility is the norm
Fiscal policy responses to shocks Building resilience to cope with volatility
FIVE SOURCES OF VOLATILIT Y
Concentration of Exports High Import Dependence
•Shocks to key natural resource or cash crop exports •Economic downturns in tourism source countries
•Fuel price shocks •Food price shocks
Significance of Remittances
•Economic downturns in remittance source countries •Tightening of labour market access •Demographic shifts in diasporas
Importance of Aid
•Can mitigate or contribute to overall economic volatility depending on donor aid policies and project cycles
Vulnerability to Natural Disasters
•Cyclones, floods, earthquakes, tsunamis •Effects of climate change
REVENUE, AID AND EXPENDITURE VOLATILIT Y Pacific Islands: Volatility in Revenue, Aid and Expenditure 0.07
0.06
0.05 PICs 0.04 Other Small States
0.03
Other MICs 0.02
0.01
0 Revenue Volatility
Aid Volatility
Expenditure Volatility
FOUR MAIN FISCAL POLICY RESPONSES
/ Assets
•Trust funds / sovereign wealth funds •Reserves •Cash balances
/ Debt
• Concessional loans from IFIs • Loans from bilateral donors • Domestic borrowing, bank overdrafts
Address Quality of Spending / Grants
• Protects service delivery in the event of revenue shortfalls, without increasing deficits • Augments value of other fiscal buffers • Grants from bilateral donors • Grants from IFIs (for countries at high risk of debt distress)
FIVE AVENUES TO BUILD RESILIENCE
Macro/Budget Management
•Prudent macroeconomic management best positions the economy against shocks and facilitates rapid donor response •Sound budget management maximizes value from resources
Debt Headroom
•Maintaining a cushion between current debt levels and ‘debt distress’ thresholds provides room to use concessional loans to mitigate the impact of shocks on the economy
Asset Buffers
•Sovereign wealth/trust funds can help mitigate the impact of shocks if they are protected from unsustainable drawdowns •Directing windfall gains to these funds or to reserves can help augment the robustness of asset buffers over time
Grants
•Process rigidity and objectives other than shock absorption mean that donor projects can add to volatility •More work is needed to make aid an effective fiscal buffer, to support the public sector’s role as a shock absorber
Sources of Volatility
•Facilitate use of alternative energy to reduce oil dependence •Facilitate natural resource/tourism industry development •Expand labour market access to secure remittances
RULES AND RESILIENCE Fiscal discipline can be important for building and maintaining the resilience to manage shocks Fiscal disciplines have tended to work well where – For deficits, they have been target ceilings (rather than rules) with justification required for breaches of the targets For debt, they have either been target ceilings, with justification required for breaches, or they have been policy moratoriums on contracting new debt, in contexts where new debt is not justifiable For sovereign wealth/trust funds, they have been rules for maintaining the value of the funds, in contexts where donors have provided additional grant support in extraordinary circumstances
In each case, the appropriateness of the form that fiscal discipline has taken has been context specific and it has been only one part of a broader fiscal management approach, including support from development partners
THANK YOU
The World Bank Pacific Department www.wordbank.org/pi
ANNEX 1: DIFFERENT T YPES OF ECONOMY Growth by Source – 1998-2008 60%
153%
50%
Natural resource & cash crops
40%
Low growth, sustained by public sector
Growth driven by inflows of tourists and remittances
30% 20%
10% 0%
Public sector
Agriculture
Other industry
Construction
Services
Natural resources
Structure of Pacific economies reflects the special challenges and opportunities facing small, remote economies.
Overall
FSM
Marshalls
Kiribati
Tuvalu
Palau
Tonga
Fiji
Vanuatu
Samoa
Solomons
PNG
Timor
-10%
ANNEX 2: IMPORTANCE OF AID
Pacific Islands: Aid (Percentage of GNI) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 FJI
PNG
TON
WSM
KIR
VAN
PLW
MHL
TUV
FSM
SOL
CAR
LMIC
LIC
ANNEX 3: SIZE OF GOVERNMENTS Pacific Islands: Total Expenditure Share of GDP 100% 90%
Pacific Islands: Wage Bill Share of GDP 35% 30%
80% 70% 60%
25% 20%
50% 40% 30%
15% 10%
20% 10% 0%
5% 0%
CASE STUDY: NATURAL DISASTERS IN SAMOA Samoa: Fiscal Responses to Successive Natural Disasters 80
80
60
60
40
40
20
20
0
0
-20
-20 FY06
FY07
FY08
FY09
FY10
tsunami
FY11
FY12
FY13(e)
cyclone
FY14(f)
FY15(f)
CASE STUDY: NATURAL DISASTERS IN SAMOA Samoa: Fiscal Responses to Successive Natural Disasters 80
80
60
60
40
40
20
20
0
0
-20
-20 FY06
FY07
FY08
FY09
FY10
tsunami
FY11
FY12
FY13(e)
cyclone
FY14(f)
FY15(f)
CASE STUDY: NATURAL DISASTERS IN SAMOA Samoa: Fiscal Responses to Successive Natural Disasters 80
80
60
60
40
40
20
20
0
0
-20
-20 FY06
FY07
FY08
FY09
FY10
tsunami
FY11
FY12
FY13(e)
cyclone
FY14(f)
FY15(f)
CASE STUDY: REMITTANCE DECLINE IN TONGA
Tonga: Remittances and Fiscal Situation 350
300
250
200
150
100
50
0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Revenue
Expenditure
Remittances in constant (FY11) TOP
No new borrowing Increased grants Improved quality of spending to mitigate the impact of the decline in revenue on service delivery Closer alignment of allocations and priorities in the approved budget Better monitoring and control of budget execution
CASE STUDY: WINDFALL GAINS IN SOLOMON IS Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years 70
35
60 50
25
40 30
15
20 10
5
0 -10
-5
-20 -30
-15 2008
2009
2010
2011
2012
2013(f)
CASE STUDY: WINDFALL GAINS IN SOLOMON IS Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years 70
35
60 50
25
40 30
15
20 10
5
0 -10
-5
-20 -30
-15 2008
2009
2010
2011
2012
2013(f)
CASE STUDY: WINDFALL GAINS IN SOLOMON IS Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years 70
7
60
6
50
5
40
4
30
3
20
2
10
1
0
0
-10
-1
-20
-2
-30
-3 2008
2009
2010
2011
2012
2013(f)
CASE STUDY: GFC ON KIRIBATI AND TUVALU The sovereign wealth/trust funds of Kiribati and Tuvalu were severely af fected by the GFC Asset values fell by over 12 percent, on average Income streams from the sovereign wealth/trust funds have been subdued since the GFC
Governments were able to increase public spending to mitigate hardship in the wake of the GFC using funds from Grant receipts Drawdowns from sovereign wealth/trust funds
These sources of funds enabled the governments to protect expenditure and service delivery, while avoiding borrowing to finance deficits, thereby supporting short term fiscal and debt sustainability
CASE STUDY: GFC ON KIRIBATI AND TUVALU Kiribati sought to maintain the real per capita value of its sovereign wealth fund at 1996 levels Since the early 2000s, drawdowns to fund deficits have exceeded sustainable levels, and Kiribati might benefit from an updated, formal rule to maintain the real per capita value at its current level
Tuvalu only receives distributions from its trust fund when the market value of the fund exceeds its targeted value (which is linked to the Australian CPI) Distributions accumulate in a reserve fund, which is available for budgetary spending Tuvalu seeks to have a sufficient balance in this reserve fund to cover a ‘dry spell’ (four years without trust fund distributions) In good years, the reserve fund should be built up so that in bad years it can be run down while financing the budget The reserve fund thus serves as an important fiscal buffer
SAVING IN GOOD TIMES… TO SPEND IN BAD TIMES Tuvalu Trust Fund Value 140.0
Tuvalu Consolidated Investment Fund Value 16.0
A$m
A$m
14.0 130.0 12.0 120.0
TTF Year-end Target Value
10.0
110.0
8.0
CIF Balance
6.0 TTF Year-end Actual Value
100.0
4.0 CIF Balance (without additional donor contributions)
90.0 2.0
80.0 2005
2006
2007
2008
2009
2010
2011
2012
0.0 2005
2006
2007
2008
2009
2010
2011
2012